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Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

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Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#341

Post by dcolkitt »

felipeko wrote: post #290
rocqua wrote: post #280

Earlier quoted context omitted.

AFAIK a stock that is available to lend does not have voting power. Hence, if you put a stock up for lending (even if no-one actually lends it) you can no longer vote with it. This can be used to get more votes by borrowing stocks just to hold and vote.

Yes, that is my understanding. But I'm asking in the case of naked short, which is what is being defended as "superior system" in this thread.

IMO, the best system would be to let anyone who's a beneficial owner cast a vote with the rest of the share class. So, if the float's 1 million shares, and 500 thousand are shorted, then there's 2 million shares held long. Let them all vote. Make this system a requirement for listing on a public exchange.

Whether a long is synthetic/borrowed or primary, their interests are aligned. They both want the company to do as well as possible. It also avoids voting rights shenanigans that exist, even with the current borrow-to-short system. At the very least it seems extending voting rights to synthetic longs won't ipso facto make corporate governance worse. I see no obvious downsides. And the academic evidence shows that removing constraints to short sales makes corporate governance significantly better.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#342

Post by JumpCrisscross »

eru wrote: post #164
jannes wrote: post #115

Earlier quoted context omitted.

I think the dilution from fractional reserve banking is priced into the buying power of each dollar somehow. You never look at the value of a dollar as the % of total dollars in circulation. The value of a dollar is rather defined by how many goods/services/other currencies you can get in exchange for it. With stock it matters a lot more how many % of a company is represented by a single share.

Each loan is also a deposit. Each debit is also a credit. Similar, each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back.

> each short seller not only adds a _virtual_ share to the market, but also has an obligation to later on buy a share back

Again, to be super clear: for everyone but market makers, the law is you have to locate the borrowed share before selling short. Market makers can naked short to provide liquidity in a buying frenzy. Given they're shorting into a buying frenzy, they tend to be quite motivated to immediately cover themselves.

We have lots of people shorting GameStop. We have zero evidence anyone is improperly naked shorting.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#343

Post by Anon1096 »

thatguy0900 wrote: post #307
auntienomen wrote: post #299

Earlier quoted context omitted.

The money goes to whoever holds the real share. A loans a share to B. Now A owns an iou, which doesn't have any voting rights. B agrees to pay A an amount of money equal to a dividend payment if a dividend is paid by the company. B goes short by selling the share to C. C owns a share of stock. When the company pays dividends, C is paid and B pays A.

Alright, thank you. That makes sense. How do the voting rights work for share A? I was under the impression that brokerages loaned the shares out without the explicit knowledge of the original owners that it was happening. Is it just that people with margin accounts functionally don't get a vote?

You lose the voting rights as well. Users on brokerages typically agree to this when signing up. Some have opt outs but you may lose features being subsidized by the brokerage having the ability to lend shares.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#344

Post by Chris2048 »

varispeed wrote: post #245
growse wrote: post #216

Earlier quoted context omitted.

Fraud requires intent to deceive. Where's the intent to deceive in short selling?

Selling something you don't own.

You do own the stock, and when you sell it you no longer own it - the person you sold it to does. You are obliged/contracted to "return the/a stock" but there is no requirement that it be the same stock, as the agreement is wrt stock as a commodity.

Furthermore, that agreement doesn't in any way apply/affect to the stock you sold (or the person you sold it to), the obligations to return is yours alone.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#345

Post by tptacek »

JumpCrisscross wrote: post #120
Lazare wrote: post #94

Very, very much a crank site. One pinch fact, two cups of confusion, and generous splash of seething rage. It's interesting in much the way the Timecube site is interesting...and is informative about financial markets in much the same way the Timecube site is as well.

This entire topic has been poorly addressed. I don’t think I’ve had stronger Gell Mann vibes on HN than I’m having with this story.

Which is why we need you around!

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#346

Post by thatguy0900 »

Anon1096 wrote: post #343
thatguy0900 wrote: post #307

Earlier quoted context omitted.

Alright, thank you. That makes sense. How do the voting rights work for share A? I was under the impression that brokerages loaned the shares out without the explicit knowledge of the original owners that it was happening. Is it just that people with margin accounts functionally don't get a vote?

You lose the voting rights as well. Users on brokerages typically agree to this when signing up. Some have opt outs but you may lose features being subsidized by the brokerage having the ability to lend shares.

Cool, thanks for explaining it to me.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#347

Post by Chris2048 »

varispeed wrote: post #283
growse wrote: post #246

Earlier quoted context omitted.

Is a future contract fraudulent then? If I sell you an August-settled coffee future, that's a promise to deliver you coffee in August. Is it fraudulent if I don't have the coffee right now? After all, I've sold you something I don't own. Of course it isn't. What matters is that the contract is fulfilled, and for equity sales in the US, the contract states that a share will be delivered to the buyer 2 days after the t…

You are comparing apples to oranges. Paying for a product in advance is quite different from selling something you don't own.

> Paying for a product in advance

From the other end, someone is accepting payment in advance i.e. selling a product that doesn't exist.

If you intend to purchase that product (or constituents of it) from third parties, then that becomes selling a product that you don't own (the third parties you intend to buy it from currently own it).

Now you can say it doesn't yet exist, or isn't yet bought, in order to fulfill the order - but the argument for selling stocks you don't own, is that you don't yet own them. I see no reason to say a genuine intent exist when fulfilling a purchase order, but not when returning a stock; kick-starter provides enough evidence against that..

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#348

Post by ZephyrBlu »

kgwgk wrote: post #240
ZephyrBlu wrote: post #188

Earlier quoted context omitted.

What do you mean by consequences? In the naked short scenario you don't immediately have the share, though I'm unsure how important this is for someone shorting the stock. In saying that, brokers can still fail to deliver the share with non-naked shorting in which case it is effectively a naked short. In the case of $GME, there were a lot of shares that failed to deliver in December as shown in this /r/wallstreetbets…

I'd say that having the share is important for the person buying the stock. Short-selling is forbidden to reduce the risk that when you want to buy a share and buy the share you find a few days later that in fact you didn't quite buy a share because whoever sold the share to you didn't have one to sell. But it's fine, I concede the point. As far as I care, you can find weird to distinguish "naked" shorting from "borr…

Ok, I understand where you're coming from now.

The person who's most affected by naked shorting is the unsuspecting person who buys the borrowed share from the shorter because nobody actually has that share yet.

From the buyers perspective I can understand the importance of this, I just didn't see how the distinction made a difference to the short interest.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#349

Post by Chris2048 »

sidibe wrote: post #340
kgwgk wrote: post #264

Earlier quoted context omitted.

In fact the "fractional" part goes the other way. You can lend the whole share you bought. But the bank cannot lend the whole dollar you deposited, they have to keep a fraction of it as reserve.

You and I can lend each other all of our money. The bank can lend more than they have.

Not really. You. nor the bank, can't lend more money that you have, but you can promise more than you have.

That automatically implies something more complicated than lending. At the very least, money was borrowed (on a promise) from a third party in order to provide the money they loaned.

You and I can do the same, I can promise you whatever I like. And if I manage to convince you, or a third party, that my promise is good, I can even borrow money from them. And loan out that money, despite not owing it; Unless there is something fraudulent in doing that wrt my agreements with the borrower - but the bank has the same, nationally regulated, restrictions too.

Re: Counterfeiting Stock – Explaining illegal naked shorting and stock manipulation

#350

Post by kgwgk »

sidibe wrote: post #340
kgwgk wrote: post #264

Earlier quoted context omitted.

In fact the "fractional" part goes the other way. You can lend the whole share you bought. But the bank cannot lend the whole dollar you deposited, they have to keep a fraction of it as reserve.

You and I can lend each other all of our money. The bank can lend more than they have.

If a bank is created and you deposit $1, the bank has $1.

They can lend only $0.9 because they need to keep $0.1 as reserve (for example).

From there different things could happen:

a) if the borrower takes the $0.9 and takes it elsewhere the bank cannot lend a single additional cent until they get more deposits.

The fractional reserve means they could only lend a fraction of the dollar.

Maybe the money will be deposited in another bank who will then lend to someone else, but for the original bank who got $1 it stops there.

b) if that money remains in the bank as a new deposit, they have now $1.9 in deposits.

They can lend a fraction of the additional $0.90, and make an additional loan of $0.81 (keeping $0.19 in reserves in total).

If the second loan also ends in the bank as a deposit they will have $2.71 in deposits, they can make a new loan etc. but the multiplier is limited.

For shares there is no limit at all.

If Alice has a share she can lend it to Bob who sells it to Carol. Carol can lend it to Daniel who sells it to Elaine. Elaine can lend it to Felix who sells it to Gloria. Gloria can lend it to Hector who sells it to Ingrid. They can go on for as long as they want and all the ladies will be long one share.

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